People, who do not have a good income statement to prove their ability to repay, can still have hope to borrow a personal loan or any loan from the bank based on their credit identity. In order to increase the poor’s rural operations, credit information companies see a huge business opportunity in building up a credit history. These companies provide credit referencing for banks and micro finance institutions which do not have the wherewithal to appraise individual borrowers.
The relevance of credit information become more significant in light of the emphasis on financial inclusion by the regulators and the government. Studies in India have shown that the ratio of savers to borrowers is as high as 7:1. The increase in net worth of a micro finance client over a three-year period is anywhere between 5-10 fold. This indicates that there is a substantial amount of saving and credit worthiness existent within poor communities.
Credit information companies – like Bangalore-based Micron – are putting together sociological, regional and other behavioural risks to arrive at credit scores for the poor who have the ability of repaying their debts. This company uses a term called ‘productive poor’ as those households that have an income of Rs 600 per month per household and have the entrepreneurial potential. And depending upon their credit history, their borrow and repay power can be determined. Value systems of regions, loan cycles, even utility bills, electoral identities can prove to be indicators for credit-worthiness of borrower. Different credit scoring models are being designed which would incorporate local variables, including geography, region, vocation and even migratory patterns.
Such companies are governed by the Credit Information Companies (Regulation) Act, 2005 that was passed last year. Micron is waiting to get the RBI approval to function as a credit information company.